Fitch says payer sector stable, buoyed by MA rate increase, robust economy
The U.S. health insurance and managed care industry's outlook for 2019 is stable, Fitch Ratings said in a new report. Fitch said financial strength ratings for health insurers range between AA- and BBB+, but most are in the A category.
Fitch said it expects "strong operational performance" in the next year. The industry will be driven by "continued robust economic and employment conditions and moderate medical cost trend."
The ratings agency also highlighted improved CMS reimbursement rates for Medicare Advantage, saying they will drive business growth. MA payment rates will increase by 3.4% next year.
The health insurance industry is in a strong place overall with growing MA and Medicaid managed care markets and expansions into other areas of healthcare, such as pharmacy benefit management, which are helping payers offset recent losses in the commercial market.
The overall stable footing for 2019 isn't a surprise. The most recent quarterly earnings reports show payers reaped huge revenue gains in Q3, including UnitedHealth Group, the nation’s largest payer, which recently predicted its revenue will reach $240 billion in 2019.
Fitch Ratings expects financial leverage will improve over the next two years as the sector sees strong cash flows and solid operating performance.
Fitch also predicted the health insurer fee moratorium in 2019 will have a limited negative effect on medical loss ratio, but won't affect the overall operating margins. Despite strong competition in the payer market, the ratings agency said premium rate adequacy will remain strong.
It's not all positive for payers, however. The report estimated the sector's EBITDA margin will decline slightly to 7.4% in 2019. That small decrease is connected to a slight increase in the medical loss ratio and merger-related expenses.
Fitch said debt service metrics will be hurt by debt issues to fund merger and acquisition activity in 2018. Most notably, Fitch mentioned the CVS-Aetna and Cigna-Express Scripts deals. Though other significant deals could happen next year, Fitch predicted payers will focus M&A activity on building out care delivery in multiple regions rather than major vertical integration. Consolidation is one uncertainty for managed care and health insurance companies.
Another area of concern is the individual exchange business. Payers have stabilized that market and many are even enjoying profits for the first time in the individual market since its inception. However, changes may weaken the ACA market, such as the end of the individual mandate penalty and expansion of short-term plans and association health plans.
"The elimination of the individual mandate beginning in 2019 could give rise to adverse selection, which could worsen the affordability issues that have plagued the individual market since the inception of the exchanges," according to the report.
Though Fitch highlighted overall stability in the health insurance market, the skies aren't as blue for other parts of the industry. In another recent report, Fitch also gave a stable outlook for the overall U.S. healthcare industry but warned of pricing and profit margin pressures. The agency also recently raised concerns about the nonprofit hospital industry.